HMRC made clear their intentions to extend the IR35 reforms to the Private Sector, which were introduced in the public sector in April 2017. This would make the “client”, i.e. the end user of the contractor’s services, responsible for assessing the contractor’s employment status. Whichever entity then pays the PSC (Personal Service Company), be that the client or an agency, will then be responsible for operating any appropriate PAYE/NIC withholding. None of the findings from their independent research on the impact of the public sector changes have led HMRC to believe that the challenges of this approach would be insurmountable for the private sector. In fact, the clear impression is that Government feel the public sector changes have been an overall success.
Other options considered in the consultation include requiring businesses to secure their labour supply chains through the use of various checks, or requiring business to keep substantial records for any off-payroll engagements. Potential solutions, which have been discounted outright include the use of a flat rate withholding for off payroll workers similar to the scheme used in the construction industry, or the introduction of an employer NIC charge for all clients using contractors.
It was thought that the changes to IR35 would potentially take effect from April 2019 but in the Autumn Statement - October 2018, it was decided to delay implementation until April 2020. It is hoped that within the next year that the proposed changes will be retracted and left as they are. After all, most believe that the current system works well - and isn't broken!
From the review in October, the government decided to limit the new rules to medium and large sized end user businesses. Small end user businesses (which may, if existing statutory definitions are adopted, be defined as those with annual turnover of less than £6.5 million, a balance sheet total of less than £3.26 million and 50 or fewer employees) will not be required to apply the new rules.
End users, recruitment agencies, payment intermediaries (umbrella companies) and contractors will now have more time than once seemed to consider how best to prepare for the changes. However, in practice there is still not that much time given that many users and suppliers will have to make substantial changes to how they use personal service company contractors if they are to avoid substantial increased costs or very unhappy contractors. This will involve major business process changes for many users and suppliers.
So what can we expect as a result of the changes to IR35 in 2020?
As expected, the government favours following the public sector model in making the end user responsible for carrying out IR35 status assessments on a case by case basis. Whoever pays the PSC (the “fee payer”) will be liable for paying employer’s NICs and deducting PAYE and employees’ NICs on an employed tax basis if the PSC contractor is assessed by the end user as being ‘inside IR35’.
A further consultation on the detailed operation of the reform will be published in the coming months. This consultation will inform the draft Finance Bill legislation, which is expected to be published in Summer 2019 (for implementation in April 2020) and it is possible that the rules may be slightly refined to address the needs of the diverse private sector market.
For further information on IR35 please call us on 01923 277900 to speak to a member of our team.